Following a two-year detailed review by the Financial Services Authority (FSA) of the UK Listing Rules and the UK listing regime the FSA has within the past few months published the changes to the Listing Rules which implement its review. This results from an expedited approach by the FSA to implementing these new measures and revamping the UK listing regime after successful lobbying by certain UK public companies.
The most significant change is the restructuring of the UK listing regime into “premium” and “standard” listings within the main market of the London Stock Exchange (LSE), which will replace the current “primary” and “secondary” listings, respectively, within that market with effect from 6 April of this year. An issuer with a secondary (to become standard) listing has fewer obligations under the Listing Rules than an issuer with a premium listing. The two-tier system within the main market is being retained but re-labelled, as the new names indicate, and at first blush would appear to suggest that the changes are only superficial in nature. However, as this article reveals, the changes are likely to have far-reaching consequences for the LSE’s main market and also for its Alternative Investment Market (AIM), some of which are undoubtedly unintended.
The creation of the new standard listing comes in the wake of increasing concern that the UK would fall foul of an EU Directive by engaging in restrictive practices by not offering a listing standard in line with the basic level available elsewhere in the EU. Furthermore, the new standard listing is expected to help the LSE compete with other EU exchanges (e.g. Amsterdam) for companies that do not want or are not able to meet the higher listing standards and requirements. The US has made similar changes in recent times by offering companies a choice of listings standards in a move by its exchanges to attract more business. For example, the New York Stock Exchange has added a new set of listing standards which permit fast-growing companies to list with lower thresholds on certain financial criteria.
At present, companies with a primary listing in the UK must comply fully with the Listing Rules, which for smaller and medium-sized enterprises (SMEs) are sometimes considered onerous and expensive. This downside provides a role for the current secondary listing option, being a less rigorous listing which does not require full compliance with the Listing Rules and where the listing requirements are markedly less stringent – e.g. there is no requirement for secondary listed companies to have a sponsor or nomad and they can enjoy more relaxed rules for corporate governance and shareholder rights. However, the current secondary listing option is only available to non-UK companies.
Most significantly for SMEs (in terms of reducing compliance costs and regulation and making it easier to raise money more quickly), the new standard listing (unlike the old secondary listing) will also be available to UK companies (other than investment companies). The new standard listing requirements are based on EU minimum standards, as follows:
- There is no need for a published three-year trading record, so that new companies may apply;
- The 12-month working capital statement can be dispensed with;
- The company does not require a sponsor or nomad (who would otherwise rigorously supervise them);
- No shareholder approval is required for significant or related-party transactions, there are no pre-emption rights for non-UK companies, and restrictions on directors’ dealings do not apply (however, notification requirements under the Disclosure and Transparency Rules and applicable UK legislation do).
In stark contrast to this, companies that strive for a premium listing must have a sponsor, a three-year trading record and must adhere to the highest standards of regulation and corporate governance, which it is expected will result in them enjoying the highest level of confidence from investors.
For most fully listed UK companies, the shift sideways from a primary to a premium listing will not involve significant changes to the Listing Rules, though it will become easier for these companies to shift down to the standard listing status. However, non-UK premium listed companies will be subject to stricter treatment under the new regime, which will require all premium listed companies (UK and non-UK) to meet the same standards, insofar as they will: (i) come under the Combined Code on Corporate Governance and will have to adopt the “comply or explain” approach in respect of that Code for financial years after 31 December 2009; and (ii) have to offer pre-emption rights to their existing shareholders when they make an offer of new shares for cash (unless there has been prior shareholder consent to dis-apply preemption rights). In addition, both non-UK premium and non-UK standard listed companies will need to provide a corporate governance statement and describe the main features of their internal control and risk management systems.
With that in mind it is worth noting that the name change from “primary” listing to “premium” listing - indicative of being held to a higher corporate governance standard - and stricter definitions of the meaning of a “premium” listing are aimed at addressing investor concerns that some non-UK companies had been able to obtain a “primary” listing in London without granting their shareholders the same rights that UK-listed companies were required to offer their shareholders. In terms of market transparency, a new rule is to be introduced that will prohibit the misrepresentation by a company of the type of listing that it has and regulatory announcements by companies will have to be accompanied with the segment (premium or standard) and category to which the company’s securities belong.
The FSA’s intention is that the new regime will increase flexibility for the main market of the LSE in that it will provide SMEs with more listing options, namely either: (i) to shift down to the standard listing (which requires a 75% resolution of shareholders approving the downgrade, but no new application to the UK Listing Authority); or (ii) (for new listing applicants) by offering a simpler and cheaper route to achieving listed status. Also, from 6 April this year, companies will be allowed to migrate relatively simply between the premium and standard listings without cancelling their listings.
The standard listing could also prove helpful for building societies and other businesses that wish to use some other security, other than equity, to raise money. Only equity shares are eligible for a premium listing but other securities such as depository receipts and profit participating deferred shares may be eligible for a standard listing.
Despite the apparent significance of these changes to the UK listing regime, the FSA has stated that it does not anticipate a significant number of companies to move from a premium listing to a standard listing, in particular because: (i) certain companies will wish to maintain their profile by retaining a premium listing and a company must have a primary (to become premium) listing if it is to be eligible for inclusion in any of the FTSE indices, both of which are important factors for liquidity; and (ii) as a corollary of that, the exclusion of companies with a standard listing from any of the FTSE indices may discourage some companies from shifting to a standard listing because many institutional investors are prevented from buying shares in companies that are not part of any of the FTSE indices.
Whilst the changes to the UK listing regime appear to signal a new dawn of choice and transparency in the UK listing environment and a boost to the global competitiveness of the UK market as an option for listing, there are detractors who have raised concerns and doubts about the new regime and in particular the need for or merit in having the standard listing. They justify themselves by pointing of course to the existence of AIM as the first and obvious port of call for growing businesses wishing to raise money and float in London but not wishing to meet the financial and/or resource demands of a premium listing on LSE’s main market. Given the long-established existence and proven success of AIM (the most successful growth market in Europe) why, they ask, is there a need for a standard listing within LSE’s main market?
AIM already enjoys lighter regulation, appropriate legal and financial flexibility that SMEs require and tax incentives to reward risk. Furthermore, in terms of light-touch but effective regulation, AIM’s biggest attraction for investors is its nomad system which underpins investor confidence in AIM. The nomad’s purpose is to explain and interpret market regulations for AIM companies and ensure these are adhered to and at the same time they have a legal obligation to ensure that an AIM business they float or act for is and remains suitable for UK public markets.
As we have already stated, companies that take a standard listing will not need a sponsor or nomad to watch over them. Indeed, it appears that the new listing regime provides scope for anyone to float a company for a standard listing, and technically, it may even be possible for companies to self-certify and float themselves for such a listing. Detractors also point out that these changes to the UK listing regime come at a time when the FSA has been trying to improve the nomad system in the financial sector and this standard listing option clearly departs from that focus.
There are therefore several possible unintended consequences of these listing changes, as follows:
- The general confusion over what a standard listing option adds to the London market and whether the market will understand the distinction between the premium and standard listing remains to be seen;
- The new standard listing regime may threaten AIM’s role as the market of choice for entrepreneurs and (with no sponsor or nomad to oversee companies as they take a standard listing) fundamentally weaken investor protection, because it is feared that companies will gravitate away from AIM and towards the easier option of a standard listing on LSE’s main market;
- There is the possibility that nomads might encourage less reputable clients to shift up to a standard listing, thereby releasing the nomad of its legal responsibilities. Indeed, it is conceivable that a financial advisory firm that did not achieve nomad status because it fell short of regulatory requirements could now bypass this rejection and float a company on the market anyway via a standard listing.
In light of the above, it will be interesting to see how the changes to the Listing Rules will affect the UK listings market in general, how investors will react to the changes and whether AIM will suffer as a consequence, all of which remains to be seen. Whilst a premium listing is required for inclusion in any of the FTSE indices, at this early stage it is widely anticipated that the main market (the Official List), rather than AIM, will bear the most significant impact, where companies are more likely to seek to shift from a premium listing to the standard listing of the main market to take advantage of the simplified rules governing transfers between the two-tier segments of the main market and the less rigorous standards of regulation that will apply to companies with a standard listing. Most commentators do not anticipate any immediate impact on AIM, which is expected to continue to fulfil its important role in attracting smaller, growing companies wanting to raise capital to develop their business whilst institutional investors in AIM companies will, in contrast to companies with a standard listing on the main market, continue to draw comfort from the higher standards of reporting and disclosure requirements in the AIM Rules and the nomad's role in guiding AIM companies through their responsibilities and obligations.